Argentine monetary crisis

President Mauricio Macri and managing director of the IMF Christine Lagarde, at the 2018 G7 Summit in Canada

The 2018 Argentine monetary crisis was a severe devaluation of the Argentine peso, caused by high inflation and steep fall in the perceived value of the currency at the local level as it continually lost purchasing power, along with other domestic and international factors. As a result of it, the presidency of Mauricio Macri requested a loan from the International Monetary Fund.^[1]

Background

The presidency of Cristina Fernández de Kirchner ended in 2015, and the new president Mauricio Macri sought to change many of the abnormal aspects of the economy of Argentina left behind by Kirchner. The Central Bank of Argentina's reserves were depleted; the annual inflation was over 30 percent, the country had the highest tax rates in history but the government budget balance had an eight-percent deficit, and government faced international legal battles over its sovereign default after the Kirchner administration refused to continue payments of the country's gigantic foreign debt. Tight currency controls had been in place since 2011 creating a parallel shadow market for foreign exchange currency and a global drop in commodity prices sharply reduced expected trade revenue furthering straining the country's already weak economy.^[2]

One of Macri's first economic policies was the removal of currency controls, allowing Argentinians to freely buy and sell foreign currencies on the market.^[3][4] Another early policy was the removal of export quotas and tariffs on corn and wheat.^[5] Tariffs on soybeans, Argentina's most lucrative export, were reduced from 35 to 30 percent.^[6] And he also ended the national default.^[7] Though these measures where applauded by the experts and foreign trade organisations, it failed to produce the economic boom that president Macri had promised during his campaign. Inflation remained high and the overall economic growth was weak.^[8] However, the modest economic recovery was enough to allow a victory at the 2017 midterm elections, surpassing Kirchner in the Buenos Aires province by a wide margin.^[9]

Ongoing crisis

Since the late 2010s, prolonged inflation remained a constant problem of economy of Argentina, with an annual rate of 25% in 2017, second only to Venezuela in South America and the highest in the G20. On December 28, the Central Bank of Argentina together with the Treasury announced a change of the inflation target.^[10] The Central Bank attempted to reduce it to 15%, by adjusting its interest rates but these efforts only managed to stop further inflation rather than reduce it.^[11] An intense drought, ranking among the world's worst natural disasters in 2018, reduced the production of soy and dried up tax revenue.^[12] Later that year the Federal Reserve of the United States increased interest rates from 0.25% to 1.75% and then 2%. This caused investors to return to the United States , leaving emerging markets. The effect, a rise in the price of the United States dollar , was modest in most countries, but it was felt particularly strongly in Argentina , Brazil and Turkey.^[10][13] Despite the high interest rates and the IMF support, investors feared that the country might fall into a sovereign default once again, especially if another administration were to be voted in during the next election cycle, and started pulling out investments.^[10]

All those factors led to a dramatic increase of the price of the US dollar in Argentina. The Central Bank increased the interest rate again, to 60%, but could not keep up.^[14]

Macri announced on May 8 that Argentina would seek a loan from the International Monetary Fund (IMF). The initial loan was $50bn, and the country pledged to reduce inflation and public spending.^[10] Federico Sturzenegger, the president of the Central Bank of Argentina, resigned a week later, alongside much of its senior staff.

Macri replaced him with Luis Caputo, and merged the ministries of treasury and finances into a single ministry, led by Nicolás Dujovne.^[15] The Turkish currency and debt crisis caused yet another increase on the price of the dollar. The tariffs on soy exports were restored, as a result of the crisis.

Caputo resigned for personal reasons, and Guido Sandleris was appointed as president of the Central Bank.^[16]

The IMF expanded the loan with an extra 7 billion U.S. dollars, the largest loan in IMF history. In exchange, the Central Bank would operate on the price of the dollar only when it surpassed certain requirements. The national budget for 2019 reduced the deficit, which was a 2.6 percent of GDP in 2018, to zero, and estimated that inflation would decrease from 44% to 23%. This budget was approved by the Congress, despite of demonstrations and Kirchnerist rejection.^[17]

In the 2019 election Alberto Fernández, Cristina Kirchner's former chief of the cabinet, was elected president. The new Kirchnerist administration immediately refused to take the remaining $11 billion of the loan and argued that that meant that it was no longer obliged to adhere to the IMF conditions.^[18] The value of the peso continued to plummet as foreign investors pulled out and the COVID-19 pandemic hit the country in early 2020. Fernández soon brought back some of Cristina Kirchner's more criticised economic policies often expanding on them. This included an extremely tight control on all currency exchange operations with a maximum of exchange of $200 US dollars per month for all citizen and a new 35% tax on all foreign currency exchange operations and froze the official exchange rate.^[19] By September 2020 the government had banned most exchange operations.^[20] This speedily brought back the parallel foreign exchange market that Macri's administration had managed to stamp out and further weakened the Argentinian government's control over its failing economy.

See also

• 1998–2002 Argentine great depression

References

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